15 Trade and other receivables

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1 15 Trade and other receivables Non-current Trade receivables Accrued income 5 3 Prepayments 1 receivables Current Trade receivables Accrued income Prepayments receivables Trade receivables do not carry interest. Management considers that the carrying value of trade and other receivables approximates to the fair value. Trade and other receivables, including prepayments, accrued income and other receivables qualifying as financial instruments are classified as loans and receivables. The maximum credit exposure arising from these financial assets is 611m (2014: 624m). Trade receivables are disclosed net of provisions for bad and doubtful debts. The provisions for bad and doubtful debts are based on specific risk assessment and reference to past default experience. Credit risk is managed separately for each customer and, where appropriate, a credit limit is set for the customer based on previous experience of the customer and third party credit ratings. The Group has no significant concentration of credit risk, with exposure spread over a large number of customers. The largest single customer is the US Federal Government, representing less than 5% (2014: less than 4%) of Group revenue. Ageing of trade receivables Trade receivables which are not impaired and not yet due Trade receivables which are not impaired and less than three months overdue Trade receivables which are not impaired and more than three months overdue Gross value of partially and fully provided receivables Provision for bad and doubtful debts (22) (17) Trade receivables Trade and other payables Non-current payables Current Trade payables payables 11 8 taxation and social security costs Accruals Deferred income Trade and other payables, including accrued expenses and other payables qualifying as financial instruments, are accounted for at amortised cost and are categorised as other financial liabilities. 17 Financial assets Available for sale financial assets include 147m (2014: 111m) UK government bonds. This investment forms part of the deficit-funding plan agreed with the trustee of one of the principal UK pension schemes. See note 9 for additional details. The Group also invests in early stage businesses that are developing or commercialising related technology. In the current year 2m (2014: nil) was invested in John Crane technologies and 1m (2014: 3m) was invested in interconnect technologies. 160 Smiths Group plc Annual Report 2015

2 18 Borrowings and net debt This note sets out the calculation of net debt, an important measure in explaining our financing position. The net debt figure includes accrued interest and the fair value adjustments relating to hedge accounting. Cash and cash equivalents Net cash and deposits Short-term borrowings Bank overdrafts (1) 150m 7.25% Sterling Eurobond 2016 (150) Bank and other loans (1) (1) Interest accrual (12) (10) (163) (12) Long-term borrowings 150m 7.25% Sterling Eurobond 2016 (150) 300m 4.125% Eurobond 2017 (214) (243) $175m 7.37% US$ Private placement 2018 (112) (104) $250m 7.20% US$ Guaranteed notes 2019 (159) (147) Revolving Credit Facility 2020 (106) $400m 3.625% US$ Guaranteed notes 2022 (253) (231) 600m 1.25% Eurobond 2023 (410) Bank and other loans (2) (1) (1,150) (982) Borrowings (1,313) (994) Net debt (818) (804) On 28 April 2015 Smiths Group plc issued a 600m Eurobond with an eight-year maturity and a fixed coupon of 1.25%. Borrowings are accounted for at amortised cost and are categorised as other financial liabilities. See note 19 for a maturity analysis of borrowings. Interest of 42m (2014: 48m) was charged to the consolidated income statement in this period in respect of public bonds. Net cash and cash equivalents Cash at bank and in hand Short-term deposits Cash and cash equivalents Bank overdrafts (1) Net cash and cash equivalents Cash and cash equivalents include highly liquid investments with maturities of three months or less. Netting Cash and overdraft balances in interest compensation cash pooling systems are reported gross on the balance sheet. The cash pooling agreements incorporate a legally enforceable right of net settlement. However there is no intention to settle the balances net, so these arrangements do not qualify for net presentation. At and there was no material gross presentation on interest compensation cash pooling systems. The balances held in zero balancing cash pooling arrangements are not included in this disclosure, since these arrangements have daily settlement of balances. Strategic report Risks and responsibility Strategic report Strategic overview Governance Strategic report Operational review Accounts Smiths Group plc Annual Report

3 18 Borrowings and net debt continued Movements in net debt Net cash and cash equivalents short-term borrowings Long-term borrowings At 189 (11) (982) (804) Foreign exchange gains and losses 2 (15) (13) Net cash inflow Repayment of borrowings Drawdown of borrowings (568) (568) Capitalisation, interest accruals and unwind of capitalised fees (1) (1) movement from interest rate hedging (1) 8 7 Change in maturity analysis (151) 151 At 495 (163) (1,150) (818) Secured loans Loans amounting to 3m (2014: 2m) were secured on plant and equipment with a book value of 3m (2014: 2m). Net debt 19 Financial risk management The Group s international operations and debt financing expose it to financial risks which include the effects of changes in foreign exchange rates, changes in debt market prices, interest rates, credit risks and liquidity risks. Treasury and risk management policies are set by the Board. The policy sets out specific guidelines to manage foreign exchange risk, interest rate risk, credit risk and the use of financial instruments to manage risk. The instruments and techniques used to manage exposures include foreign currency derivatives, debt and other interest rate derivatives. The central treasury function monitors financial risks and compliance with risk management policies. The management of operational credit risk is discussed in note 15. (a) Foreign exchange risk Transactional currency exposure The Group is exposed to foreign currency risks arising from sales or purchases by businesses in currencies other than their functional currency. It is Group policy that, when the net foreign exchange exposure to known future sales and purchases is material, this exposure is hedged using forward foreign exchange contracts. The net exposure is calculated by adjusting the expected cash-flow for payments or receipts in the same currency linked to the sale or purchase. This policy minimises the risk that the profits generated from the transaction will be affected by foreign exchange movements which occur after the price has been determined. Hedge accounting documentation and effectiveness testing are only undertaken if it is cost effective. The following table shows the currency of financial instruments. It excludes loans and derivatives designated as net investment hedges. Sterling US$ Euro At Financial assets and liabilities Financial instruments included in trade and other receivables Financial instruments included in trade and other payables (41) (185) (55) (55) (336) Cash and cash equivalents Borrowings not designated as net investment hedges (151) (11) (3) (165) Exclude balances held in operations with the same functional currency (155) (149) (72) (138) (514) Exposure arising from intra-group loans (101) (28) (49) (178) Forward foreign exchange contracts (163) (165) (7) (87) 162 Smiths Group plc Annual Report 2015

4 19 Financial risk management continued Sterling US$ Euro At Financial assets and liabilities Financial instruments included in trade and other receivables Financial instruments included in trade and other payables (37) (171) (69) (60) (337) Cash and cash equivalents Borrowings not designated as net investment hedges (150) (10) (3) (163) (129) Exclude balances held in operations with the same functional currency 128 (167) (71) (142) (252) Exposure arising from intra-group loans (37) (3) (40) Forward foreign exchange contracts (87) (88) Financial instruments included in trade and other receivables comprise trade receivables, accrued income and other receivables which qualify as financial instruments. Similarly, financial instruments included in trade and other payables comprise trade payables, accrued expenses and other payables which qualify as financial instruments. Based on the assets and liabilities held at the year end, if the specified currencies were to strengthen 10% while all other market rates remained constant, the change in the fair value of financial instruments not designated as net investment hedges would have the following effect: Impact on profit for the year Gain/(loss) recognised in reserves Impact on profit for the year Gain/(loss) recognised in reserves US dollar 4 (2) 4 (1) Euro 4 (1) Sterling These sensitivities were calculated before adjusting for tax and exclude the effect of quasi-equity intra-group loans. Cash-flow hedging The Group uses foreign currency contracts to hedge future foreign currency sales and purchases. At contracts with a nominal value of 317m (2014: 201m) were designated as hedging instruments. In addition, the Group had outstanding foreign currency contracts with a nominal value of 314m (2014: 237m) which were being used to manage transactional foreign exchange exposures, but were not accounted for as cash-flow hedges. The fair value of the contracts is disclosed in note 20. The majority of hedged transactions will be recognised in the consolidated income statement in the same period that the cash-flows are expected to occur, with the only differences arising as a result of normal commercial credit terms on sales and purchases. Of the foreign exchange contracts designated as hedging instruments 92% are for periods of 12 months or less (2014: 100%). The movements in the cash-flow hedge reserve during the period are summarised in the table below: Year ended Year ended Brought forward cash-flow hedge reserve at start of year 2 Exchange adjustments Gains/(losses) on effective cash-flow hedges recognised in equity 2 1 Amounts removed from the hedge reserve and recognised in the following lines on the income statement revenue (4) cost of sales 1 1 Carried forward cash-flow hedge reserve at end of year 3 Strategic report Risks and responsibility Strategic report Strategic overview Governance Strategic report Operational review Accounts Smiths Group plc Annual Report

5 19 Financial risk management continued Translational currency exposure The Group has significant investments in overseas operations, particularly in the United States and Europe. As a result, the sterling value of the Group s balance sheet can be significantly affected by movements in exchange rates. The Group seeks to mitigate the effect of these translational currency exposures by matching the net investment in overseas operations with borrowings denominated in their functional currencies, except where significant adverse interest differentials or other factors would render the cost of such hedging activity uneconomic. This is achieved by borrowing primarily in the relevant currency or in some cases indirectly through the use of forward foreign exchange contracts and cross-currency swaps. Net investment hedges The table below sets out the currency of loans and swap contracts designated as net investment hedges: Sterling US$ Euro At Loans designated as net investment hedges (524) (624) (1,148) Cross currency swap contracts (306) 302 (4) Currency swap contracts 90 (90) 90 (830) (322) (90) (1,152) Sterling US$ Euro At Loans designated as net investment hedges (588) (243) (831) Currency swap contracts 185 (45) (50) (90) 185 (633) (293) (90) (831) At swap contracts in other currencies hedged the Group s exposure to Canadian dollars, Japanese yen and Chinese renminbi (: Canadian dollars, Japanese yen and Chinese renminbi). All the currency swap contracts designated as net investment hedges are current (2014: 58% current with the balance maturing within two years). The cross currency swap contracts will mature in April The gains and losses that have been deferred in the net investment hedge reserve are shown in the table below: Year ended Year ended Brought forward net investment hedge reserve at start of year (58) (176) Amounts deferred in the period on effective net investment hedges (8) 118 Carried forward net investment hedge reserve at end of year (66) (58) The fair values of these net investment hedges are subject to exchange rate movements. Based on the hedging instruments in place at the year end, if the specified currencies were to strengthen 10% while all other market rates remained constant, it would have the following effect: Loss recognised in hedge reserve Loss recognised in hedge reserve US dollar Euro These movements would be fully offset by an opposite movement on the retranslation of the net assets of the overseas subsidiaries. These sensitivities were calculated before adjusting for tax. (b) Interest rate risk The Group operates an interest rate policy designed to optimise interest cost and reduce volatility in reported earnings. The Group s current policy is to require interest rates to be fixed for greater than 70% of the level of gross debt. This is achieved primarily through fixed rate borrowings, and also through the use of interest rate swaps. At 57% (2014: 63%) of the Group s gross borrowings were at fixed interest rates, after adjusting for interest rate swaps and the impact of short maturity derivatives designated as net investment hedges. The Group monitors its fixed rate risk profile against both gross and net debt. For medium-term planning, it now focuses on gross debt to eliminate the fluctuations of variable cash levels over the cycle. The weighted average interest rate on borrowings and cross-currency swaps at, after interest rate swaps, is 3.98% (2014: 4.51%). 164 Smiths Group plc Annual Report 2015

6 19 Financial risk management continued Interest rate profile of financial assets and liabilities and the fair value of borrowings The following table shows the interest rate risk exposure of investments, cash and borrowings, with the borrowings adjusted for the impact of interest rate hedging. The other financial assets and liabilities do not earn or bear interest and for all financial instruments except for borrowings the carrying value is not materially different from their fair value. Available for sale investments Cash and cash equivalents Borrowings of borrowings Available for sale investments Cash and cash equivalents Borrowings of borrowings Fixed interest Less than one year (151) (158) (1) (1) Between one and five years (399) (443) (544) (619) Greater than five years 147 (296) (290) 111 (146) (142) fixed interest financial assets/(liabilities) 147 (846) (891) 111 (691) (762) Floating rate interest financial assets/(liabilities) 467 (467) (467) 169 (303) (303) interest-bearing financial assets/(liabilities) (1,313) (1,358) (994) (1,065) Non-interest-bearing assets/(liabilities) in the same category (1,313) (1,358) (994) (1,065) Interest rate hedging At the Group has designated the following fair value hedges: US$150m interest rate swaps which mature on 12 October 2022 hedging the US$ 2022 Guaranteed notes; 120m interest rate swaps which mature on 5 May 2017 hedging the 2017 Eurobond; and the fixed/floating element of 400m of /US$ interest rate swaps which mature on 28 April 2023 hedging the 2023 Eurobond. These positions hedge the risk of variability in the fair value of borrowings arising from fluctuations in base rates. At, the first two of these hedging arrangements were in place. The fair values of the hedging instruments are disclosed in note 20. The effect of the swaps is to convert 462m (2014: 184m) debt from fixed rate to floating rate. Sensitivity of interest charges to interest rate movements The Group has exposure to sterling, US dollar and euro interest rates. However the Group does not have a significant exposure to interest rate movements for any individual currency. Based on the composition of net debt and foreign exchange rates at, and taking into consideration all fixed rate borrowings and interest rate swaps in place, a one percentage point (100 basis points) change in average floating interest rates for all three currencies would have a 0.2m (2014: 0.7m) impact on the Group s profit before tax. Based on the investments held at a one percentage point (100 basis points) increase in sterling interest rates would reduce the carrying value of investments by 19m (2014: 15m), generating a corresponding charge to reserves. (c) Financial credit risk The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not currently expect any counterparties to fail to meet their obligations. Credit risk is mitigated by the Board-approved policy of only placing cash deposits with highly rated relationship bank counterparties within counterparty limits established by reference to their Standard & Poor s long-term debt rating. In the normal course of business, the Group operates cash pooling systems, where a legal right of set-off applies. The maximum credit risk exposure in the event of other parties failing to perform their obligations under financial assets, excluding trade and other receivables and derivatives, totals 651m at (2014: 307m). UK government bonds with at least a AA credit rating (note 17) Cash at banks with at least a AA- credit rating Cash at banks with a A+ credit rating Cash at other banks investments Strategic report Risks and responsibility Strategic report Strategic overview Governance Strategic report Operational review At the maximum exposure with a single bank for deposits and cash is 108m (2014: 60m), whilst the maximum mark to market exposure for derivatives is 4m (2014: 3m). These banks have AA- and AA- credit rating, respectively (2014: AA- and A). Accounts Smiths Group plc Annual Report

7 19 Financial risk management continued (d) Liquidity risk Borrowing facilities The Board policy specifies the maintenance of unused committed credit facilities of at least 200m at all times to ensure it has sufficient available funds for operations and planned development, which is provided by a multi-currency revolving credit facility. On 19 February 2014 Smiths completed the refinancing of its existing $800m Revolving Credit Facility. The first of two uncommitted extension options was exercised on 4 February The facility now matures on 19 February The remaining uncommitted one-year extension option can be exercised in December At the balance sheet date the Group had the following undrawn credit facilities: Expiring within one year Expiring between one and two years Expiring after two years Cash deposits As at, 391m (2014: 75m) of cash and cash equivalents was on deposit with various banks of which 301m (2014: 4m) was on deposit in the UK. Gross contractual cash-flows for borrowings Borrowings (Note 18) adjustments Contractual interest payments contractual cash-flows Borrowings (Note 18) adjustments Contractual interest payments contractual cash-flows Less than one year (163) (1) (41) (205) (12) (36) (48) Between one and two years (215) 3 (43) (255) (150) (48) (198) Between two and three years (113) (34) (147) (243) 5 (37) (275) Between three and four years (159) (1) (26) (186) (104) (27) (131) Between four and five years (15) (15) (254) (1) (19) (274) Greater than five years (663) (16) (39) (718) (231) (6) (30) (267) (1,313) (15) (198) (1,526) (994) (2) (197) (1,193) The figures presented in the borrowings column include the non-cash adjustments which are highlighted in the adjacent column. The contractual interest reported for borrowings is before the effect of interest rate swaps. Gross contractual cash-flows for derivative financial instruments Receipts Payments Net cash-flow Receipts Payments Net cash-flow Less than one year 326 (304) (247) 9 Greater than one year 20 (18) 2 81 (73) 8 Less than one year 470 (483) (13) 222 (225) (3) Greater than one year 326 (320) 6 26 (16) 10 1,142 (1,125) (561) 24 This table presents the undiscounted future contractual cash-flows for all derivative financial instruments. For this disclosure, cash-flows in foreign currencies are translated using the spot rates at the balance sheet date. The fair values of these financial instruments are presented in note 20. Gross contractual cash-flows for other financial liabilities The contractual cash-flows for financial liabilities included in trade and other payables are: 324m (2014: 323m) due in less than one year, 7m (2014: 9m) due between one and five years and 5m (2014: 5m) due after more than five years. 166 Smiths Group plc Annual Report 2015

8 20 Derivative financial instruments The tables below set out the nominal amount and fair value of derivative contracts held by the Group, identifying the derivative contracts which qualify for hedge accounting treatment: Contract or underlying nominal amount At Net Foreign exchange contracts (cash-flow hedges) (5) 3 Foreign exchange contracts (not hedge accounted) (2) foreign exchange contracts (7) 3 Currency swaps (net investment hedges) Currency swaps (not hedge accounted) (5) (2) (5) 5 Cross currency swaps (fair value and net investment hedges) 276 (4) (4) Interest rate swaps (fair value hedges) (2) 2 financial derivatives 1, (18) 6 Balance sheet entries Non-current 4 (6) (2) Current 20 (12) 8 financial derivatives 24 (18) 6 Contract or underlying nominal amount Foreign exchange contracts (cash-flow hedges) (3) Foreign exchange contracts (not hedge accounted) (1) foreign exchange contracts (4) At Net Currency swaps (net investment hedges) (1) 6 Interest rate swaps (fair value hedges) (4) 2 financial derivatives (9) 8 Balance sheet entries Non-current 9 (4) 5 Current 8 (5) 3 financial derivatives 17 (9) 8 Currency swaps not hedge accounted These contracts comprise derivatives which were previously part of the net investment hedging programme and matching contracts to eliminate this exposure. There is no further net exposure arising from these contracts. Accounting for other derivative contracts Any foreign exchange contracts which are not formally designated as hedges and tested are classified as held for trading and not hedge accounted. Netting International Swaps and Derivatives Association (ISDA) master netting agreements are in place with derivative counterparties except for contracts traded on a dedicated international electronic trading platform used for operational foreign exchange hedging. Under these agreements if a credit event occurs, all outstanding transactions under the ISDA are terminated and only a single net amount per counterparty is payable in settlement of all transactions. The ISDA agreements do not meet the criteria for offsetting, since the offsetting is enforceable only if specific events occur in the future, and there is no intention to settle the contracts on a net basis. Strategic report Risks and responsibility Strategic report Strategic overview Governance Strategic report Operational review Gross value of assets and liabilities 24 (18) 17 (9) Related assets and liabilities subject to master netting agreements (4) 4 (4) 4 Net exposure 20 (14) 13 (5) Accounts Smiths Group plc Annual Report

9 21 of financial instruments Notes Carrying value Carrying value Level 1 valuations Financial assets other investments Level 2 valuations Financial derivatives assets Borrowings 18 (1,313) (1,358) (994) (1,065) Financial derivatives liabilities 20 (18) (18) (9) (9) Level 3 valuations Financial assets other investments Investments with level 1 valuations comprise quoted government bonds. Derivatives, including forward exchange contracts, currency swaps, interest rate instruments, and embedded derivatives, are valued at the net present value of the future cash-flows calculated using market data at the balance sheet date (principally exchange rates and yield curves). Borrowings are valued at the net present value of the future cash-flows using credit spreads and yield curves derived from market data. Borrowings are carried on the balance sheet at amortised cost adjusted for fair value interest rate hedging. The fair value of fixed rate borrowings is only used for supplementary disclosures. Cash, trade receivables and trade payables are excluded from this table because carrying value is a reasonable approximation to fair value for all these assets and liabilities. 22 Commitments Operating lease commitments minimum lease payments The minimum uncancellable lease payments which the Group is committed to make are: Land and buildings Land and buildings Payments due not later than one year later than one year and not later than five years later than five years commitments At, commitments, comprising bonds and guarantees arising in the normal course of business, amounted to 159m (2014: 153m), including pension commitments of 54m (2014: 51m). 168 Smiths Group plc Annual Report 2015